Greece's bailout will fail

A
demonstrator during a rally in Athens on June 10 making the
victory sign in front of a banner depicting a wrecking ball
reading "no" and destroying a wall with anti-austerity
measures.AP Photo/Petros
Karadjias

The agreement is pretty similar in structure to both the one
Greece had in 2010 and the one it had in 2012. Those agreements
helped propel radical the Syriza party to power in January, but
the will of the Greek people wasn't enough to get a significantly
improved offer from Europe. If the country wants to stay in the
eurozone, this is all it's getting.

It's possible to break down the deal into three likely
insurmountable problems.

1. Greece has already tried and failed at many of these reforms
before

The Greek programme of structural reforms is likely to be
ludicrously optimistic.

For example, if the €50 billion (£35.14 billion, $54.82 billion)
figure for privatisation revenues floated by the creditors sounds
familiar, that's because you've heard it before. Here's the
beginning of an
Economist article from July 2011:

WITH a target of €50 billion ($72 billion) by 2015, Greece's
privatisation plan aims to raise more cash as a share of GDP than
any OECD government has managed before ... Most privatisation
programmes involve a trade-off between long-term structural
reform and short-term fund-raising. In Greece's case, there is an
urgent need for money.

Not July this year. July 2011. World Bank, Deutsche Bank

In reality, Greece raised closer t0 €5 billion (£3.51 billion,
$5.48 billion) in privatisation revenues, and that was hard
enough politically. These reforms have helped to sink two
governments, but the country is still uncompetitive compared with
much of the rest of Europe:

Unpopular liberalisations, privatisations, and austerity are part
of what has now devastated Greece's two former mainstream
political parties. Back in 2009, Pasok and New Democracy got more
than three quarters of the vote between them. In polls now,
they're getting closer to one quarter.

The programme would require Syriza to be more successful than its
predecessors in implementing the austerity and reform package,
even though it is more ideologically opposed to both than any
previous government.

US economist
Tyler Cowen has suggested that Greece needs a
"Thatcheropoulous": a "strong, credible, pro-debt renegotiation,
pro-capitalism, anti-corruption, pro-tax fairness, and
pro-foreign investment" politician. But it doesn't seem as if
there is one on offer.

2. There's too much debt and not enough growth

The International Monetary Fund (IMF)
conceded on Wednesday morning something that perhaps would
have been useful to the Greek negotiating team a week or two ago:
The country's debt is unsustainable.

That's something a lot of people have said for a long time, but
it's new coming from the IMF. Before, Greece's debt was judged to
be just "highly vulnerable."

Oxford
Economics

There are two components to Greece's debt problems. One, of
course, is taking on too much debt.

But the other is the absolutely abysmal performance of Greece's
economy in the past five years — so any measure (such as debt as
a proportion of gross domestic product) that uses the size of the
economy as a benchmark will look worse.

There's simply no real hope for a rapid turnaround here. Nominal
GDP, a combination of inflation and real growth, has been sliding
for five years. Europe's inflation is very low, and Greece is
actually seeing outright deflation. Because Athens is not in
control of the euro, there's no prospect of devaluing the
currency either.

The reforms Greece has taken on, such as lifting restrictions on
hiring and firing employees, may have been a good thing to do
anyway. But they will take years to make a meaningful
contribution to growth.

3. Surpluses are still painful, and the problems reinforce one
another

Barry Eichengreen, one of the world's most renowned economic
historians, found in
2014 (when Greece's economy at least looked as if it may grow
a little) that the country would need to run a primary surplus
worth 7.2% of its GDP — that's a government budget surplus before
debt interest payments are accounted for, every year between 2020
and 2030. That would allow the country to reach the 60%
debt-to-GDP ratio that it's meant to be aiming for.

To achieve such a reduction over the same period, that figure
would now be even higher given that the economy is
almost certainly back in recession. As the IMF conceded on
Wednesday morning, debt levels have spiralled even higher.
Eichengreen looked at 54 countries over 40 years and found only
three that had run surpluses worth more than 5% of GDP for a
10-year period. None had run a surplus as large as the one Greece
would need.

Economic historian Barry
Eichengreen.Wikimedia

The Greek surpluses are now smaller under the new bailout deal,
with an aim for just 3.5% of GDP. But that of course means
drawing the process out over a much longer period of time.

The country could get debt relief, as the IMF is proposing. But
there's a catch. The country's
European creditors are offering "debt-mitigating measures
that would be granted only once the commitments to reform from
the Greek authorities has been demonstrated."

Those measures are the same ones in the passage above that have
been so difficult (or impossible) to implement over the past five
years. Without a sudden burst of success in bringing them in now,
debt relief will still be contested.

The problems reinforce one another, with debt relief now attached
to the implementation of practically impossible reforms. Onerous
debt repayments are likely to mean lower growth. Lower growth, or
recession, means higher debt. Failed privatisation means that
revenue will have to be found somewhere else to make debt
repayments.

Europe may yet be able to work out some way of keeping Greece in
the euro in the long-term — but this deal isn't it.